-Refer to the above figure. Suppose the economy is operating at point A. There is a recessionary gap of ________, which can be closed by ________.
A) $3 trillion; increasing government spending by $1 trillion
B) $1 trillion; expansionary fiscal policy that shifts the short-run aggregate supply curve through point C
C) $2 trillion; expansionary fiscal policy that generates another $2 trillion in total spending
D) $2 trillion; an increase in government spending of $14 trillion

Question

-Refer to the above figure. Suppose the economy is operating at point A. There is a recessionary gap of ________, which can be closed by ________.
A) $3 trillion; increasing government spending by $1 trillion 
B) $1 trillion; expansionary fiscal policy that shifts the short-run aggregate supply curve through point C 
C) $2 trillion; expansionary fiscal policy that generates another $2 trillion in total spending 
D) $2 trillion; an increase in government spending of $14 trillion

Quizplus · Accepted Answer

Expansionary fiscal policy that generates an additional $2 trillion in total spending can close a recessionary gap when the economy is operating below its potential output, as indicated by point A. This approach typically involves measures such as tax cuts or increased government spending to stimulate economic activity and shift the aggregate demand curve to the right, towards full employment.

-Refer to the Above Figure